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The Movie "The Big Short" Hits a Home Run in Being Somewhat Informative

Tuesday, January 5th, 2016

I recently had the chance to see the new movie, "The Big Short."

I was curious on how good of a job the writers and producers would do putting this movie together, and was surprised at how attentive the audience was in the theater due to some of the dialogue getting rather technical.

I thought it was a nice twist when they had some well-known actors and actresses like Selena Gomez try to explain some of the terms by making comparisons that people may understand.

I did feel, however, that the movie blamed the big banks for everything and I'm sorry to say that is not the case. The housing bust was caused by the greed of many people, not just the banks.

In the movie, the characters are talking to a stripper who has over 10 loans, owns five houses and a condo. No matter what your occupation, being that far in debt should not make sense to anyone.

I do remember back then when I was telling potential clients that we look for an average in return of around 10% over a seven year period, and many people would just laugh and say “I can make 25 or 30% per year in real estate with no risk.” At that point in time there was no doubt in my mind that we were in a real estate bubble.

During that time I was on the local news discussing how expensive real estate was, and received complaints from viewers saying I didn't know I was talking about and that I was just a wet blanket. I presume some smart people did listen to me, but the greed was speaking louder than I was.

Other things that didn't make sense during that time-frame (and I hope people learn from in the movie) was a conversation with some mortgage brokers that people need to at least skim over the documents that they sign.

The mortgage brokers in the movie were those types of salesmen who a person should know better than to do business with. They even joked and laughed about what they referred to as “ninja loans,” which stood for "no income, no job."

Here again I have to put some fault on the person buying the home, knowing that they don't have the money or the means to pay back the loan they signed. Many of these people try to blame the banks for forcing them to do it, but in truth these borrowers knew they couldn’t pay back the loan.

In the movie they also discuss CMO's (collateralized mortgage obligations), which were mortgages packaged and sold to investors. I remember talking with the other advisors (or should I say brokers) who were so excited about the yield that they could give their clients.

When I looked at the investment and compared it to a plain vanilla GNMA, which is from the Government National Mortgage Association, this is the other side of the loan: yields on these GNMA’s would be lower than the CMO's.

So my question was- how could you package many of these loans, charge fees, pay brokers commission for selling these and pay a higher yield and still have the same degree of safety?

I knew there was no way that could be done, so I never sold a CMO. Unfortunately once again greed came into play and investors did not want the lower yielding fixed income products, instead they blindly went after the yield. There was a high demand for these CMO’s and the banks met the demand. The demand for higher-yielding products was so high that they created what was known as CDO's, which stands for collateralized debt obligations. Very similar to a CMO, except now it did not have to include just mortgages.

The market side and investment side are both supply/demand driven, and if there is no demand for bad investments or mortgages the banks would not create them.

One last thing on the mortgage side of the housing bust was people were no longer buying a home, but were trying to make some fast money.

So when you see the news media showing these people out on the street because they lost their home, it is hard for me to feel sorry for them when I know they didn't have the income in the first place to pay for the loan and didn't even take the time to read the one page Truth-in-Lending Disclosure statement.

This document came out in 1968, called the Truth in Lending Act (TILA). This document shows in clear terms what your introductory rate and monthly payment will be, and then the maximum that could be possible with the current loan. I don't think it takes any brains to see the difference between the current payment and potential high payment.

However no one wanted to look at the reality, so therefore it is hard for me to feel sorry for those people. Look at your own loan sometime and you'll see how easy it is to read that document. It’s not buried in the fine print.

Lastly, I want to talk about how patient the hedge fund manager in the movie was. Patience is one thing that many people lack when it comes to investing, and that is why long term they are not successful investors.

When you watch the movie you will notice he was wrong for nearly 4 years, but he had done his research and knew he would be right. For some reason when it comes to investing, investors want a quick return. They want to do the investment today and have a go up next week or month, but after year they become too impatient and want to sell.

In the movie you can see how hard it was for the fund manager having investors wanting to sell day after day, and he would say no. As a comparison in today's time, I would relate that to the energy market.

We hold energy in our portfolio because we have a diversified portfolio, and there is no doubt in my mind that the energy situation will change and the price of oil will rebound. It does take patience to be a good investor and resist the temptation to sell because things currently are not going your way. Receiving pressure from clients to sell the energy can make it hard, but fundamentally it is the right thing to do.

I do know it is emotionally hard for some investors to deal with, but history has proven time and time again selling low is not a good strategy. Some of the biggest and brightest investors have done very well by investing where it was not popular to do so.

I hope you will enjoy “The Big Short” if you haven't seen it already, and any questions you have on the investment side please feel free to post those questions on my social media sites or contact me directly and I will answer them for you.

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